Local Exchange Systems: Sustainable Alternatives to Capitalism? by Lindsay Tallon

“It’s just like in Peter Pan. We clapped our hands, we all believed, and poof! there it was.” That was my introduction to the concept of money, the first time I really thought about what money is, courtesy of my college economics professor. He actually asked us to close our eyes, clap our hands, and believe in money; I did, it worked. Of course it helped that I had money in my pocket.

My professor’s point was to remind us that money, so often treated as an integral cog in the machine of society, is a conceptual invention of our collective imagination. It is also a physical invention: we do, quite literally, grow money from trees.

As an extension to physical money, we have come to believe in the stock market and its array of securities options. The complexity of our economic system makes understanding it a daunting task. But a key part of advancing environmental sustainability involves confronting the economic structure that governs society. If we understand the functions of capitalism, perhaps we can meet these functions in a more sustainable way.

It is easy to articulate the core function of capitalism: it exists to perpetuate capital for its own sake. We can superimpose social, political and environmental aims, but as an economic theory, its main function is accumulation of capital.

This function has led (or at least allowed) businesses to engage in environmentally destructive practices that degrade rivers, lakes, streams, and the ocean, destroy habitat and biodiversity, pollute the air, and accelerate climatic changes with devastating effects.

In addition to destroying the environment, capitalism is dull in the sense that it is unresponsive to reality. It manufactures needs, while at the same time failing to provide real necessities such as food and shelter to the majority of the world’s population.

Besides its core function and its resulting harm, capitalism serves to facilitate the provision of goods and services that are useful or beautiful[1], or both, and to allow humans to meet our needs and desires by having access to these goods and services.

Can this important function be met in a more sustainable way?

Anarchist and socialist theories conceptualize alternative economic structures to provide necessities and desires. However, we are unlikely to experience an economic revolution anytime soon due to the deeply entrenched institutionalization of capitalism (not to mention a lack of political and societal motivation).

Thus, local exchange systems operating within our capitalist economy can serve as a way to meet the functions of capitalism—providing goods and services and meeting human needs and desires—without traditional money.

How do they work? Individuals and businesses join the system, sometimes for free but usually by paying a small membership fee.[2]

Upon joining, members receive (depending on the system) either a currency in physical “dollars”, or initial credit in a database that tracks the credits and debts of members.

Members then spend that currency or credit on goods and services for which the currency is accepted.

They create new credit by “selling” goods or services.

The systems are usually locally-based, meaning membership is restricted to resident individuals and businesses, in order to support the local economy and foster community relationships.

One of the oldest[3] and most developed local exchange systems in the U.S. is called Ithaca Hours. Its directory of goods and services includes dance instruction, photography, graphic design, musical instruments and lessons, painting, counseling, home health care, bed and breakfasts, construction, plumbing, real estate services, moving services, and, somewhat ironically, there is a listing for a fundraising counselor.[4]

Local exchange systems tend to advance sustainability because they foster a deeper connection between people and their acts of consumption than does capitalism. This connection promotes communitarian as opposed to material values. Communitarian values generally emphasize human relationships and de-emphasize materialism; this translates to less consumption, and the planet is better off.[5]

Of course, local exchange systems do not necessarily promote sustainability. Maybe the painters use toxic paints and the plumbers have not heard of low-flush toilets. But as environmental awareness spreads and sustainability becomes more financially viable due to economies of scale, surely the creative, community-minded folks participating in their local economy will incorporate sustainability into their own practices.

Additionally, the system’s bylaws could institutionalize philosophies and practices of sustainability, just as a business can institutionalize environmental responsibility in its articles or bylaws.[6]

Articles or bylaws language could direct the LETS to develop policies on sustainability: a waste and energy reduction policy for the internal operation of LETS; a policy of sustainability measurements that are prerequisites to sellers’ membership.

The interplay between local exchange systems and the law occurs mainly in the tax field. While tax law generally favors such systems, small changes would result in their further support.

Tax law relating to local exchange systems is complicated by IRS vagueness, and should be clarified. Generally, the confusion is not with tax itself, because the systems are usually non-profits with tax-exempt 501(c)(3) status.[7] The confusion lies with reporting requirements.

In 1995, an IRS Private Letter Ruling held that a non-profit local exchange system was not subject to reporting requirements.[8] The IRS reasoned that the organization facilitated “informal exchange . . . on a noncommercial basis and [did] not result in the creation of contractual rights and obligations among members (or between members and [the nonprofit corporation]) for the exchange of property or services.”[9]

On the other hand, if a system creates a commercial arrangement and binding contracts, it must report to the IRS.[10] It must report the transaction information of its members. This promotes member compliance with personal and business tax reporting and payment requirements stemming from barter transactions.[11]

The legal distinctions between commercial versus noncommercial and contractual versus noncontractual obligations have not been clearly delineated in this context by the IRS.[12]

The question of commerciality may depend on whether a membership fee was charged. However, it is also possible that systems without membership fees would be considered commercial.[13]

The question of contract formation depends in part on whether a reasonable person in the offeree’s shoes believed the offeror intended a binding contract.[14]

The answers to these questions in the context of barter arrangements have not been expounded upon by the IRS, nor have they been litigated.[15]

The effect of this vagueness is to promote the use of barter systems more than if a reporting requirement was uniformly present; systems can promote themselves as noncommercial without contractual obligations.[16]

However, barter systems that do not report are taking the risk of being deemed a commercial and contractual arrangement by the IRS and thus subject to penalties.[17]

For the purposes of notice and fairness, the IRS should provide greater clarity on what constitutes commerciality and contractual obligations in this context.

Tax law relating to individual and business members is relatively simple: members pay income tax on net earnings through their participation in the system. The tax is calculated using the fair market value of the products or services bartered[18], so members are no worse off than if they were using regular money.

While this does not chill barter transactions, participation in barter arrangements would be better promoted by exempting transactions from federal income tax. The exemption could be restricted to transactions not done as part of a member’s trade or business.[19]

Exempting this small fraction of economic activity would promote community-focused barter arrangements. It’s simple: untaxed people helping people (and themselves).

Economic practices opposing capitalism are hard to imagine on a large scale, but local exchange systems allow people to share their skills and meet their needs outside the boundaries of capitalism. They are a way for us to clap our hands, believe, and poof! the dull experience of capitalism fades to the background.

[3] The idea of alternate currencies is much older than Ithaca Hours’ 1991 origin. For example, there are documents of a dried cacao bean currency in sixteenth century Nicarauga, see Young, Allen M. The Chocolate Tree: A Natural History of Cacao. University Press of Florida: Gainesville, 2007, p. 29-30.

[19] For a brief proposal that fleshes out this idea, see Pareja, Sergio. It Takes a Village: The Problem with Routinely Taxing Barter Transactions. Catholic University Law Review. Spring, 2010, p.809-814. 59 CATHULR 785.